With the big news late last week from American Express and Capital One, little doubt remains that the mortgage crisis is now fully flowing to the credit card and personal credit industry.

To recap American Express stated that they would be taking a $440 million pretax charge against their 4th quarter earnings. The reason given was increasing bad loans and lower spending. Capital One also released that their results were below expectation caused by the same problems.

This news is quite concerning for the industry particularly Amex’s announcements since they have been historically seen as having a very high quality and low risk portfolio. Especially since they have a large portion of their portfolio on a non-revolving product. The slowdown in spending severely hurts Amex based on its business model. Amex is their own network therefore their model of issuing non-balance carrying products pays off since the merchant discount rate (amount merchants pay the credit card companies for each transaction) is all kept by Amex alone with no middleman (like a bank). Since spend in decreasing “across all merchant sectors” this can have severe impacts on their bottom line earnings.

Capital One faces larger problems since they have been an issuer traditionally built through targeting subprime customers. In recent years they have shifted focus on super-prime customers to offset their book balances initially for regulatory compliance purposes but have since managed to turn that business profitable. However, a downturn in subprime can have sever impacts on losses.

Is this all the bad news? No way.

With unemployment forecasted to continue increasing and hitting 5.0% as well as further deterioration in the housing market, credit card charge offs are probably only at the tip of the iceberg. Consumers typically would pay their mortgage payments first for a couple of good reasons. One being that they need a roof over their heads and second being that mortgages are secured loans meaning their is something physical attached to the loan (a house). Credit cards are unsecured being that there is nothing a bank can repossess initially except through collection efforts.

Let’s brace for more.

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